When creating a retirement account such as a IRA, 401(k) or other defined benefit plan, an individual is usually (and hopefully) instructed to name at least one beneficiary to the account. Upon the individual's death, the beneficiary (if still alive) will then inherit the account balance without having to go through the probate process.
Sometimes, though, an individual forgets to review and update the beneficiary designations on their retirements accounts. If the primary and contingent beneficiaries predecease the individual or if there is no primary and/or contingent beneficiary listed, then usually the account will revert to the estate and be subject to probate.
But, what happens to the retirement account if 1) no beneficiaries are named or have predeceased and 2) no personal representative is appointed to administer the decedent's estate?
Hawaii Revised Statutes Section 523A-3(14) provides that any property in an individual retirement account, defined benefit plan, or other account or plan that is qualified for tax deferral under the Internal Revenue Code is presumed to be abandoned three years after the earlier of:
(1) the distribution or attempted distribution of the property OR
(2) the date of the required distribution as stated in the plan or trust agreement governing the plan, or as specified in the Interal Revenue Code by distribution shall be nade to avoid a tax penalty.
This means the retirement account will be considered abandoned property and will eventually escheat to the State of Hawaii.
As a general rule of thumb, one should review their estate plan every three to five years to determine whether life changes or new laws merit making revisions to their plan. As part of the estate plan review, one should also examine the beneficiary designations on their retirement accounts to ensure that their primary and contingent beneficiaries are updated and current.
When a person dies, who has priority to be appointed the personal representative (also known as the executor) of the decedent's estate? A personal representative is a person (or entity) that has the authority to administer the decedent's estate. Generally speaking, this means paying off tax, funeral expenses, debts and distributing the remainder of the estate assets.
Hawaii Revised Statutes Section 560:3-203 provides a list of interested persons who may be appointed as the personal representative to administer the estate. They are as follows from highest to lowest priority:
(1) The person with priority as determined by a probated will including a person nominated by a power conferred in a will;
(2) The surviving spouse or reciprocal beneficiary of the decedent who is a devisee of the decedent;
(3) Other devisees of the decedent;
(4) The surviving spouse or reciprocal beneficiary of the decedent
(5) Other heirs of the decedent; and
(6) Forty-five days after the death of the decedent, any creditor.
This list would apply in situations where a decedent died with a Will (testate) or without a Will (intestate).
In addition to directing where and how a person's property is distributed upon their death, a Will allows a person to nominate an individual or corporation (such as a bank) to serve as the personal representative. Such a nomination would help avoid a situation where multiple parties may fight to be appointed the personal representative since they have equal priority to serve under Hawaii Revised Statutes Section 560:3-203.
A person may contest a Will that is presented informally for probate. Informal probate is a procedure where a Will is presented to the registrar (not a judge) for consideration. In other words, there is no hearing before a judge. The registrar will review the probate application and Will and determine whether to accept the Will and make an appointment of a personal representative.
If the registrar does make an appointment of a personal representative through the informal probate procedure, then an interested person may initiate a formal proceeding (before a judge) to contest the appointment of the personal representative and the submission of the Will.
An interested person may contest a Will before the first of the following to expire:
1. 90 days after receiving notice of an informal proceeding
2. 12 months from the date the Will was informally admitted to probate or
3. 30 days from the entry of a formal order approving the accounts and settlement of the estate by an informally appointed personal representative.
Also, a challenge may be commenced by an interested person after the expiration of the above-stated limitation periods if an informal probate is closed informally (meaning the closing of the probate matter is not approved by a judge, but rather by the personal representative filing a closing statement) and notice of the informal probate proceeding was not properly given. Furthermore, the challenge must be commenced within five years of the decedent's date of death.
What happens when a personal representative cannot find any living heirs or devisees of a decedent? Hawaii Revised Statutes Section 531-33 provides a procedure for the disposition of property in this scenario.
First, the personal representative will need to file a petition to have the estate's final accounts approved. Notice will need to be published in the newspaper for a period of not less than three consecutive weeks. All claimants for a distributive share of the estate then have 90 days from the date of first publication to present a claim to their share of the estate.
If no claims are presented within the 90 days or if a portion of the estate remains unclaimed after this period, then after the court approves the settlement and accounts of the estate, the court or registrar may direct the personal representative to transfer the remainder of the property to the State Director of Finance.
The State Director of Finance is then instructed to sell any property, if possible, at public auction. The proceeds are then held pursuant to Hawaii Revised Statutes Chapter 523A, which the unclaimed property law.
According to Hawaii Revised Statutes Section 523A(15), generally speaking, property is presumed to be abandoned five years after the owner had a right to demand the property or after the obligation to pay or distribute the property arises.
Administering a decedent's estate can be a confusing and convoluted process. There are the funeral arrangements, various bills that may need to be paid, and the transferring of property to the decedent's heirs or devisees. A critical part of trust and estate administration in Hawaii is knowing the priority of claims. In other words, which bills need to be paid first? How should the decedent's assets be allocated? This post briefly summarizes the priority of claims against a decedent's estate.
In Hawaii, under the Uniform Probate Code, a surviving spouse has a right of election against the decedent spouse's estate. This will be explained in greater detail below, but for historical background, we will briefly discuss the related concepts of Dower and Curtesy.
Up until 1977, a surviving spouse was given an automatic life estate equal to 1/3 interest in any real property owned by the decedent spouse. For men, this was known as Curtesy and for women it was referred to as Dower. Dower affected the husband's real property in that he could not convey his interest in real property without his wife signing off. The wife, on the other hand, could convey her real property without needing her husband's signature.
Dower and Curtesy was replaced in 1977 by the Hawaii Uniform Probate Code. Under the UPC, the surviving spouse has the right to take an "elective share" of the augmented estate, which consists of both the decedent spouse and surviving spouse's estates. The amount of the "elective share" is determined by the length of the marriage and is set out under Hawaii Revised Statutes Section 560:2-202.
Generally speaking, the augmented estate consists of the following:
b. Property in which the decedent retained the right to possession or enjoyment during his
lifetime (i.e. life estates, retained income interest, etc; or
c. Property over which the decedent retained a general power of appointment.
The surviving spouse's elective share is in addition to the homestead allowance, exempt property and family allowance, as were discussed in a previous post.
The probate process in Hawaii can be onerous, time-consuming and costly. However, if the decedent's estate meets certain conditions, initiating a probate with the courts is sometimes not necessary. Hawaii law, namely Haw. Rev. Stat Section 560:3-1201, allows a decedent's next-of-kin to collect the decedent's property by affidavit. The following are the conditions that must be met for a decedent's property to be marshaled by a Collection by Affidavit:
Furthermore, Haw. Rev. Stat. Section 531-20 mandates that "every banking house, fiduciary company, agent, or trustee" must disclose the nature and kind of property being held when presented with the Collection by Affidavit.
A drawback to the Collection by Affidavit method is that any next-of-kin could potentially sign an affidavit and collect the assets unbeknownst to the decedent's other relatives. Obviously, this could lead to discord and friction between the decedent's relatives. If the decedent desired the property to be given to a certain person(s), then leaving the assets to be collected by affidavit is not recommended. The Collection by Affidavit method is simple, but can also be easily abused.
Banks and other financial institutions usually have their own Collection by Affidavit forms or an attorney can draft an affidavit that could encompass the assets generally. Either way, the Collection by Affidavit can be a cost-effective method to marshal a decedent's assets and a simple alternative to having to file for probate.
Hawaii Probate: Homestead allowance, Exempt property, and Family Allowance in Hawaii - A Brief Overview
When a person dies in Hawaii and probate is commenced, there are certain obligations that have priority over others. The "homestead allowance", " exempt property" and " family allowances" are distributions made to a surviving spouse or reciprocal beneficiary (and any minor or dependent children) that generally have a greater priority over any other claims made against the estate. The money allotted to the surviving spouse and any minor/dependent children is not insubstantial and is meant to supplement and help sustain the decedent's surviving spouse and children during the probate administration in Hawaii.
Provided that the estate has a somewhat cooperative and competent personal representative, these allowances should be easy for the surviving spouse and children to get. All that is required is for an eligible person, such as a surviving spouse, to make a claim to the personal representative. The personal representative may then distribute the allowances without prior court order or approval.
Below is a brief explanation of each allowance. For brevity's and simplicity's sake, "surviving spouse" and "reciprocal beneficiary" are interchangeable.
Homestead allowance: In Hawaii, the "homestead allowance" is codified under Hawaii Revised Statutes Section 560:2-402. For the homestead allowance, the surviving spouse is entitled to a sum of $15,000. Again, not a manini amount. If there is no surviving spouse, the $15,000 would be divided equally between each minor and dependent child of the decedent.
Exempt property: Next in line is "exempt property", which is outlined in Hawaii Revised Statutes Section 560:2-403. Under the exempt property statute in Hawaii, the surviving spouse is entitled to take up to $10,000 worth of "household furniture, automobiles, furnishings, appliances, and personal effects." As with the homestead allowance, if there is no surviving spouse, then the decedent's children can jointly take up to $10,000 worth of property. However, exempt property is usually fulfilled last and is subordinate to the homestead and family allowances.
Family allowance: Last, but not least, is the "family allowance", which is detailed under Hawaii Revised Statutes Section 560:2-404. The statute states that the surviving spouse and any minor children who were being supported by the decedent may take a "reasonable allowance" for the spouse's and children's "maintenance" during the probate administration. The Hawaii Probate Rules limits the total amount of family allowance that may be distributed to no more than $18,000 without a court order. Therefore, the family allowance distribution may exceed $18,000, but only upon court approval. This means the person(s) requesting more money will have to petition the court and justify to the judge why the additional funds are needed.
Some additional family allowance tidbits:
Sometimes a situation arises where a person passes away with multiple Wills and it may be unclear which Will is valid. If there is uncertainty regarding which Will controls and the disposition of the estate varies significantly from one Will to another, the potential for a Will dispute or challenge increases dramatically. Therefore, it is useful to know how to effectively revoke a Will to ensure that there is no confusion about which Will controls upon your death.
In Hawaii, Hawaii Revised Statutes Section 560:2-507 details how a Will may be revoked, whether in whole or in part. The methods a person may use to revoke a Will are as follows:
Method #1: Execute a subsequent Will. Having the most recently executed Will state unequivocally that all prior Wills are revoked is probably the cleanest way of revoking a Will aside from shredding the original and copies of any prior Wills.
Method #2: Performing a physical, revocatory act. Hawaii Revised Statutes Section 560:2-507(a)(2) states that a person may perform an act with the intent and purpose of revoking the Will to effectuate the revocation. This "revocatory act" may include doing the following to the Will:
Method #3: Implied Revocation. If a subsequent Will fails to expressly revoke prior Wills, Hawaii Revised Statutes Section 560:2-507(b) states that the previous Will may still be revoked by way of inconsistency IF the person intended the subsequent Will to replace rather than supplement the prior Will.
According to Hawaii Revised Statutes Section 560:2-507(c), there is a presumption that a subsequent Will replaces a prior Will in its entirety if the latest Will makes a complete disposition of the estate. This presumption may be overcome by "clear and convincing evidence".
HOWEVER, if the subsequent Will did NOT dispose of the entire estate, then the presumption is reversed (Hawaii Revised Statutes Section 560:2-507(d)). As before, the presumption came be overcome by "clear and convincing" evidence. Courts are generally reluctant to consider a subsequent Will as a complete replacement of a prior Will if the subsequent Will does not dispose of the entire estate. In that instance, the court would likely treat the subsequent Will as a "codicil", which is a supplement to a prior Will. The subsequent Will would only replace the prior Will where there are inconsistencies and both Wills would be effective to the extent they are in agreement.
Hawaii Revised Statutes Section 572-24 is Hawaii's spousal liability statute and states that a spouse is liable for the debts incurred by the other spouse for all necessaries for themselves, one another or their family during marriage.
The Hawaii Intermediate Court of Appeals affirmed the plain reading of Hawaii Revised Statutes Section 572-24 in Queen's Medical Center v. Kagawa. The ICA stated that "the statute is a legal command that each spouse 'shall be bound to maintain, provide for, and support' the other spouse and 'shall be liable for all debts contracted by one another for necessaries...during marriage'". As a matter of public policy, promoting a definite and clear spousal duty, "best informs husbands and wives of the extent of their obligations...and encourage providers to extend necessaries to needy spouses."
In Kagawa, the husband and wife had separated, but not legally divorced. The husband incurred medical expenses related to a medical emergency and ultimately died. The ICA held that the medical services provided by Queen's Medical Center were necessaries for which he was indebted. Since husband and wife were still legally married at the time the debt was incurred, the wife became responsible for the medical debt upon the husband's passing.
In the context of probate, the surviving spouse is generally not liable for the individual debts of the deceased spouse. However, an exception exists for debts incurred that fall under the category of necessaries. The ICA has made it clear that the medical debt of the deceased spouse is considered a "necessary" and, therefore, is the responsibility of the surviving spouse.
As an aside, the ICA noted that relieving support obligations under Hawaii Revised Statutes Section 572-24 based on the wrongful conduct of a spouse would contradict Hawaii's partnership approach to family law. Therefore, fault or misconduct (such as infidelity) would not eliminate a spouse's obligation of support under Hawaii Revised Statutes Section 572-24.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
DISCLAIMER: All content and information is provided by The Law Office of Samuel K.L. Suen, LLLC and is for general informational and discussion purposes only and does not constitute legal advice. Transmission of this information is not intended to create, and receipt does not constitute, a formation of an attorney-client relationship. The information presented at this site is believed to be accurate when made, but may not be complete, is not updated, reviewed or revised on a regular basis. No representations or warranties whatsoever, express or implied, are given as to the accuracy, applicability or validity of the information contained herein. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances. You should not act or rely on this information without consulting with a licensed attorney.
To ensure compliance with requirements imposed by the IRS, please note that any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained herein.
Copyright © 2018 Law Office of Samuel K.L. Suen, A Limited Liability Law Company. All Rights Reserved.